U.S. - Affiliated Foreign Government Securities Broker-Dealers

The Department of the Treasury, pursuant to its authority
under the Government Securities Act of 1986 (GSA), adopted, with
modification on July 3, 1990, an exemptive rule by adding Section
401.9 to part 401 of Title 17 CFR. This amendment, which conforms
substantially to Securities and Exchange Commission (SEC) Rule
15a-6 (17 CFR 240.15a-6), was adopted to provide exemptions from
the broker-dealer registration or notice requirements for foreign
government brokers or dealers engaged in certain activities
involving U.S. investors and the government securities market
provided the entities comply with SEC Rule 15a-6 as modified in
Section 401.9.

The staff of the SEC has recently granted no-action and
interpretative relief with respect to the application of Section
15(a) of the Securities Exchange Act of 1934 and Rule 15a-6. We
are forwarding the enclosed, an SEC Division of Market Regulation
letter dated April 9, 1997, to Cleary, Gottlieb, Steen &
Hamilton, to make you aware of the SEC no-action position
concerning the securities activities of U.S.-affiliated foreign
broker-dealers under Section 15 of the Securities Exchange Act of
1934.

Consultations between the staffs of the Department of the
Treasury and the SEC have affirmed that comparable issues arise in
connection with the registration requirements for foreign government
securities brokers or dealers under the GSA regulations.
Accordingly, the no-action and interpretative relief granted by the
staff of the SEC with respect to the application of Section 15(a) of
the Exchange Act and Rule 15a-6 also applies equally with respect
to entities that are subject to Section 401.9 of the GSA
regulations, including any financial institution who has filed
notice as a government securities broker or dealer.

As described in the enclosed letter, the SEC no-action
position is being issued in response to a request from nine U.S.
registered broker-dealers to relax certain restrictions on the
securities activities of foreign broker-dealers in the U.S.
securities markets that were imposed by the SEC and GSA rules.
With respect to electronic quotation systems, the Department
adopts the position taken by the SEC regarding this issue, and
will continue to provide interpretative guidance concerning foreign
broker-dealer quotation systems based on the fact specific nature of
these arrangements provided by the requesting specialized government
securities broker-dealer.

Please distribute this letter and the SEC no-action letter
to your examiners and to specialized government securities broker-
dealers registered with the SEC under Section 15C of the Securities
and Exchange Act of 1934 (15 U.S.C. 78o-5) (15C Firms) that to the
best of your knowledge may be affected by the SEC no-action and
interpretative relief as it applies to Section 401.9 of the GSA
regulations.

Any questions regarding this letter, or any other questions
pertaining to interpretation of the GSA regulations should be
directed to the Government Securities Regulations Staff at (202)
219-3632.

The Department of the Treasury, pursuant to its authority
under the Government Securities Act of 1986 (GSA), adopted, with
modification on July 3, 1990, an exemptive rule by adding Section
401.9 to part 401 of Title 17 CFR. This amendment, which conforms
substantially to Securities and Exchange Commission (SEC) Rule
15a-6 (17 CFR 240.15a-6), was adopted to provide exemptions from
the broker-dealer registration or notice requirements for foreign
government securities brokers or dealers engaged in certain
activities involving U.S. investors and the government securities
market provided the entities comply with SEC Rule 15a-6 as
modified in Section 401.9.

The staff of the SEC has recently granted no-action and
interpretative relief with respect to the application of Section
15(a) of the Securities Exchange Act of 1934 and Rule 15a-6. We
are forwarding the enclosed, an SEC Division of Market Regulation
letter dated April 9,1997, to Cleary, Gottlieb, Steen & Hamilton,
to make you aware of the SEC no-action position concerning the
securities activities of U.S.-affiliated foreign broker-dealers
under Section 15 of the Securities Exchange Act of 1934.

Consultations between the staffs of the Department of the
Treasury and the SEC have affirmed that comparable issues arise
in connection with the registration requirements for foreign
government securities brokers or dealers under the GSA regulations.
Accordingly, the no-action and interpretative relief granted by
the staff of the SEC with respect to the application of Section
15(a) of the Exchange Act and Rule 15a-6 also applies equally with
respect to entities that are subject to Section 401.9 of the
GSA regulations, including any financial institution that has
filed notice as a government securities broker or dealer.

As described in the enclosed April 9, 1997 letter, the
SEC no-action position is being issued in response to a request
from nine U.S. registered broker-dealers (the Firms) to relax
certain restrictions on the securities activities of foreign broker
-dealers in the U.S. securities markets that were imposed by the
SEC and GSA rules. The SEC no-action letter:

Expands the definition of “major U.S. institutional investor.”
The no-action relief will permit, on the same basis as permitted
for transactions with “major U.S. institutional investors” under
Rule 15a-6, a U.S.-affiliated foreign broker or dealer to enter
into transactions with any entity, including any investment
adviser (whether or not registered under the Investment Advisers
Act), that owns or controls (or, in the case of an investment
adviser, has under management) in excess of $100 million in
aggregate financial assets (i.e., cash, money market instruments,
securities of unaffiliated issuers, futures, and options on
futures and other derivative instruments).

Provides guidance confirming that under certain prescribed
circumstances, in transactions involving U.S. Government securities
or foreign securities intermediated by a U.S. broker-dealer under
Rule 15a-6, clearance and settlement may occur through the direct
transfer of funds and securities between a U.S. investor and the
foreign broker-dealer in situations where the foreign broker-dealer
is not acting as custodian of the funds or securities of the U.S.
investor. In requesting the relief, the Firms stated that the
interposition of a U.S. broker-dealer in the clearance and
settlement process causes a significant duplication of functions
by the U.S. broker-dealer and foreign broker-dealer. The Firms
argued that this duplication of functions is inefficient and
increases the risk of operational errors and settlement failure,
including effecting duplicative transfers of funds and securities.

Provides relief on the permissible contacts with certain U.S.
investors by foreign associated persons of U.S. affiliated foreign
broker-dealers. The no-action relief would permit, under certain
circumstances, foreign associated persons of a U.S.-affiliated
foreign broker-dealer, without the participation of an associated
person of a U.S.-affiliated broker-dealer, to (a) engage in oral
communication from outside the United States with U.S.
institutional investors and (b) have in-person contacts during
visits to the United States with major U.S. institutional
investors.

Regarding electronic quotation systems, both the Department of
the Treasury and the SEC have previously stated that they view
the dissemination of third-party market quotes in the United States
by foreign government securities brokers or dealers as
solicitation. However, in concurrence with the SEC's position in
the Adopting Release (Exchange Act Release No. 27017, July 1989),
the Department in its preamble commentary to the proposed rule
(55 FR 7736, March 5, 1990) allowed the dissemination of
foreign broker-dealer quotations in the United States through
third-party systems without registration under certain prescribed
circumstances. The position has been available provided that the
third-party systems distributed the quotations primarily in
foreign countries, and the third-party systems themselves did not
allow securities transactions to be executed between the foreign
broker-dealer and U.S. investors.

Given the increasingly global scope of the securities markets
since the time of the adoption of Rule 15a-6, this distinction
between third-party systems that distribute quotations primarily
in the U.S. and those systems that distribute quotations primarily
in foreign countries is no longer a useful regulatory dividing
line. Accordingly, the SEC no-action position clarifies that the
interpretative portions of its Adopting Release requiring
operation of quotations systems by third parties that primarily
distribute foreign broker-dealer quotations in foreign countries
no longer apply.

The Department will continue to provide interpretative
guidance concerning foreign broker-dealer quotation systems based
on the fact specific nature of these arrangements provided by the
requesting party.

Please distribute this letter and the SEC no-action
letter to your examiners and to financial institutions that have
filed notice as a government securities broker or dealer that to
the best of your knowledge may be affected by the SEC no-action
interpretative relief as it applies to Section 401.9 of the GSA
regulations. Any questions regarding this letter, or any other
questions pertaining to interpretation of the GSA regulations,
should be directed to the Government Securities Regulations Staff
at (202) 219-3632.

This letter responds to your letter dated March 24, 1997, on
behalf of nine U.S. registered broker-dealers (the “Firms”) n1
in which you request assurances that the staff will not recommend
enforcement action to the Commission against any of the Firms
or any foreign broker or dealer affiliated with any of the Firms
(a “U.S.-Affiliated Foreign Dealer”) if any of the U.S.-Affiliated
Foreign Dealers engages in the securities activities described in
your letter without registering as a “broker” or “dealer” under
Section 15 of the Securities Exchange Act of 1934
(“Exchange Act”) in reliance on the exemption from broker-dealer
registration in Exchange Act Rule 15a-6.

As you note in your letter, in the years since the Commission
adopted Rule 15a-6, internationalization of the securities markets
has continued to accelerate. One result is that U.S. and foreign
securities firms compete with one another to offer a wide range of
financial products and services to their customers. In addition,
institutional investors have taken a global approach in formulating
their investment strategies. Moreover, the expanded use of
electronic communication technology has facilitated the
dissemination of securities-related information and cross border
trading activity, further developing the interrelationship between
U.S. and foreign markets. You request relief from the staff on a
number of specific aspects of Rule 15a-6 that you believe pose
significant obstacles to the effective operation of international
securities activities by U.S. broker-dealers and their foreign
affiliates. n2

n2 You note that comparable issues arise in connection with the
registration requirements for foreign government securities brokers
or dealers under the Government Securities Act of 1986, codified at
Section 15C of the Exchange Act. The Department of the Treasury,
pursuant to its authority under Exchange Act Section 15C(a)(5), has
adopted an exemptive rule that largely parallels Rule 15a-6. See 17
C.F.R. @ 401.9. Accordingly, pursuant to 17 C.F.R. @ 400.2(d),
you request that any no-action or interpretive relief granted by
the staff in response to this request with respect to the application
of Section 15(a) of the Exchange Act and Rule 15a-6 also apply
equally with respect to the entities that are subject to 17 C.F.R.
@ 401.9.

I. Expanded Definition of “Major U.S. Institutional Investor”

Rule 15a-6, among other things, permits foreign broker-dealers
to conduct certain securities activities with “U.S. institutional
investors” and “major U.S. institutional investors,” as those terms
are defined in the Rule, provided that those foreign broker-dealers
conduct those activities in conformity with the provisions of Rule
15a-6. These definitions do not include U.S. business corporations
and partnerships, nor do they permit investment funds to qualify as
major U.S. institutional investors if they are advised by investment
managers that are exempt from registration under the Investment
Advisers Act of 1940. It is your belief that these investors may have
financial wherewithal comparable to that of institutional investors
covered by the Rule, and that the Rule's failure to include these
investors within the definitional criteria set forth in the Rule
severely constrains the utility of the Rule 15a-6 exemption.

As a result, you request the staff to provide no-action relief that
will permit U.S.-Affiliated Foreign Dealers to expand the range of
U.S. investors with which they may enter into securities transactions
in reliance on paragraph (a)(3) of Rule 15a-6. Specifically, you
request that the staff grant no-action relief that will permit, on
the same basis as permitted for transactions with “major U.S.
institutional investors” under Rule 15a-6, a U.S.-Affiliated Foreign
Dealer to enter into transactions with any entity, including any
investment adviser (whether or not registered under the Investment
Advisers Act), that owns or controls (or, in the case of an investment
adviser, has under management) in excess of $ 100 million in aggregate
financial assets (i.e., cash, money-market instruments, securities
of unaffiliated issuers, futures and options on futures and other
derivative instruments).n3 n3 You note that the asset test would be
calculated on a gross basis, without deduction for liabilities of
the institution, based on the balance sheet or comparable financial
statement of the institution prepared in the ordinary course of its
business. You also note that the requested relief in this
context would apply to transactions in U.S. and foreign
securities.

II. Direct Transfer of Funds and Securities Between U.S. Investors
and U.S.- Affiliated Foreign Dealers

You also request relief from a provision of Rule 15a-6(a)(3) that
requires a U.S. registered broker-dealer to intermediate
transactions between U.S.-Affiliated Foreign Dealers and U.S.
institutional investors and major U.S. institutional investors. In
particular, you note that paragraph (a)(3)(iii)(A)(6) of Rule 15a-6
requires that a U.S. broker-dealer intermediary be responsible for
receiving, delivering, and safeguarding funds and securities in
connection with transactions between U.S.-Affiliated Foreign
Dealers and U.S. institutional investors and major U.S. institutional
investors in compliance with Rule 15c3-3 under the Exchange Act. It
is your contention that Rule 15a-6(a)(3)(iii)(A)(6) is unclear in
circumstances where a U.S. investor and a foreign broker-dealer wish
to settle a securities transaction intermediated by a U.S. broker-
dealer involving the direct transfer of funds and securities. In
particular, you note that questions have arisen regarding
whether, under the Rule, the clearance and settlement of all such
transfers must be effected through the accounts of the U.S. broker-
dealer intermediating the transaction.

Interposition of a U.S. broker-dealer in the clearance and settlement
process, you contend, causes a significant duplication of functions
by the U.S. broker-dealer and foreign broker-dealer, including
effecting duplicate transfers of funds and securities. You argue that
this duplication of functions is inefficient and increases the risk
of operational errors and settlement failure. As a result, you ask the
staff to confirm that in transactions involving foreign securities n4
or U.S. Government securities intermediated by a U.S. broker-dealer
under Rule 15a-6, clearance and settlement may occur through the
direct transfer of funds and securities between a U.S. investor and
a foreign broker-dealer in situations where the foreign broker-dealer
is not acting as custodian of the funds or securities of the U.S.
investor. For such transactions in such securities the U.S. investor
or its custodian could transfer funds or such securities directly
to the foreign broker-dealer or its agent and the foreign broker-
dealer or its agent could transfer any funds or such securities
directly to the U.S. investor or its custodian. This requested relief
would apply only in circumstances where (1) the foreign broker-dealer
agrees to make available to the intermediating U.S. broker-dealer
clearance and settlement information relating to such transfers and
(2) the foreign broker-dealer is not in default to any counterparty
on any material financial market transaction. Moreover, the requested
relief would apply solely to the operational issue of the transfer of
funds and securities between a foreign broker-dealer and a U.S.
institutional investor or major U.S. institutional investor
(including those investors with which a U.S.-Affiliated Foreign
Dealer would be able to enter into transactions pursuant to the
relief you request in Part II.A of your letter) in the context of
clearance and settlement of transactions in foreign securities or
U.S. Government securities between that foreign broker-dealer and
that U.S. investor where the foreign broker-dealer is not acting as
custodian for the U.S. investor.

n4 You use the term “foreign securities” as defined in your
previous correspondence relating to Rule 15a-6. See Cleary,
Gottlieb, Steen &amp; Hamilton (November 22, 1995, revised January 30,
1996).

You note that the granting of such relief should not be construed
to suggest that the staff has made any implicit or explicit
determinations regarding the permissibility of any particular
transaction or custodial arrangement related to such a transfer.
In this regard, you acknowledge that the foreign broker-dealer
would continue to be required to ensure that each such transaction
and any custodial arrangement qualifies in all other respects for
exemption under the Rule, even though the direct transfer of funds
and securities would be permitted to occur as described above.
Finally, you note that the intermediating U.S. broker-dealer would
fulfill all of the other enumerated duties under paragraph (a)(3)
(iii)(A) of the Rule, including effecting the transactions, issuing
required confirmations and maintaining required books and records
relating to the transactions.

You also request relief from the provisions of Rule 15a-6 that
require an associated person of a U.S. broker-dealer intermediary
to participate in certain communications between foreign associated
persons of a foreign broker-dealer and certain U.S. investors.
In particular, you note that paragraph (a)(3)(iii)(B) of Rule 15a-6
requires that an associated person of the U.S. broker-dealer
intermediary participate in all oral communications between foreign
associated persons and U.S. institutional investors other than major
U.S. institutional investors, and that paragraph (a)(3)(ii)(A)(1) of
Rule 15a-6 requires participation by an associated person of the U.S.
broker-dealer intermediary in connection with visits in the United
States by a foreign associated person with both U.S.
institutional investors and major U.S. institutional investors.

1. Chaperoning Requirements

You argue that these “chaperoning” requirements have proven awkward
to implement in practice, particularly in the context of those
markets that are separated from the U.S. by a large number of time
zones. You contend that they also provide only slight policy
benefits in light of the experience and capabilities of the U.S.
institutional investors eligible to enter into transactions under
paragraph (a)(3) of Rule 15a-6 and the other investor protections
provided by the Rule, such as the requirement that the foreign
associated person not be subject to a statutory disqualification as
defined in Section 3(a)(39) of the Exchange Act. Accordingly, you
request that the staff grant no-action relief that would permit
foreign associated persons of a U.S.-Affiliated Foreign Dealer,
without the participation of an associated person of an affiliated
Firm, n5 to: (1) engage in oral communications from outside the
United States with U.S. institutional investors where such
communications take place outside of the trading hours of the
New York Stock Exchange (i.e., at present, 9:30 a.m. to 4:00 p.m.
New York Time), so long as the foreign associated persons do not
accept orders to effect transactions other than those involving
foreign securities (as defined in note 5 of your letter) and (2)
have in-person contacts during visits to the United States with
major U.S. institutional investors (including those investors
with which a U.S.-Affiliated Foreign Dealer would be able to
enter into transactions pursuant to the relief requested in
Part II.A of your letter), so long as the number of days on
which such in-person contacts occur does not exceed 30 per year
and the foreign associated persons engaged in such in-person
contacts do not accept orders to effect securities transactions
while in the United States. n6

n5 As you note, foreign associated persons of the U.S.-Affiliated
Foreign Dealers could continue to have “unchaperoned” contacts
with U.S. persons at any time if they are dually employed or
“two-hatted” (i.e., also qualified as registered representatives
acting on behalf of and under the supervision of an affiliated
Firm under U.S. self-regulatory organization guidelines).

n6 As you request, the staff is clarifying that the limitations
set forth in paragraph (a)(2)(ii) of Rule 15a-6 would not prohibit
a foreign broker-dealer from initiating follow-up contacts with
major U.S. institutional investors (including those entities
qualifying pursuant to the relief you request in Part II.A of
your letter) to which it has furnished research reports, if such
follow-up contacts occur in the context of a relationship between
a foreign broker-dealer and a U.S. intermediary broker-dealer
under the Rule.

2. Electronic Quotation Systems

In addition, you seek relief with respect to the U.S. distribution
of foreign broker-dealers' quotations. In the release adopting
Rule 15a-6, the Commission indicated that the Rule “generally
would permit the U.S. distribution of foreign broker-dealers'
quotations by third party systems...that distributed these
quotations primarily in foreign countries” provided that the third
-party systems did not allow securities transactions to be executed
between the foreign broker-dealer and persons in the U.S. through
the systems. n7 In other words, in the absence of other contacts
with U.S. investors initiated by the third party systems,
distribution of such quotes by such systems would not be considered
to be a form of solicitation. n8 Because third-party quotation
services have become increasingly global in scope since Rule 15a-6
was adopted, it is your view that the distinction between systems
that distribute quotations primarily in the U.S. and those that
distribute quotations primarily in foreign countries is no longer
a useful regulatory dividing line. As a result, as you request, the
staff is clarifying that the interpretive portions of the Adopting
Release requiring operation of quotation systems by third parties
that primarily distribute foreign broker-dealers' quotations
(including prices and other trade-reporting information input
directly by foreign broker-dealers) in foreign countries no
longer apply.

n8 As the Commission stated in the Adopting Release, however,
foreign broker-dealers whose quotes were distributed through
such systems would not be allowed to initiate contacts with U.S.
persons “beyond those exempted under the Rule, without registration
or further exemptive rulemaking.”

With respect to proprietary quotation systems, you highlight a
passage from the Adopting Release where the Commission noted that
“the direct dissemination of a foreign market maker's quotations
to U.S. investors, such as through a private quote system
controlled by a foreign broker-dealer would not be appropriate
without registration, because the dissemination of these quotations
would be a direct, exclusive inducement to trade with that foreign
broker-dealer.” You note, however, that there is no express
indication that the Commission's position in the Adopting Release
is intended to preclude a foreign broker-dealer from directly
inducing U.S. investors to trade with the foreign broker-dealer
via a quotation system where the U.S. investor subscribes to the
quotation system through a U.S. broker-dealer, the U.S. broker-
dealer has continuing access to the quotation system, and
the foreign broker-dealer's other contacts with U.S. investors
are permissible under Rule 15a-6. In this regard, as you request,
the staff is confirming that providing U.S. investors with access
to screen-based quotation systems that supply quotations, prices
and other trade-reporting information input directly by foreign
broker-dealers will not constitute an impermissible contact with a
foreign broker-dealer, so long as any transactions between the U.S.
investor and the foreign broker-dealer are intermediated in
accordance with the requirements of Rule 15a-6. As you note, a
foreign broker-dealer that directs quotations to U.S. investors
through a proprietary system (as distinct from a third-parry
system) would be viewed as having “solicited” any resulting
transactions (and thus could not rely on the exemption in paragraph
(a)(1) of Rule 15a-6), although it would continue to be allowed
to effect transactions in reliance on other available provisions
of the Rule.

Response:

While not necessarily agreeing or disagreeing with the reasoning
contained in your letter, based on the facts and representations
presented, the staff of the Division of Market Regulation will not
recommend enforcement action to the Commission under Section 15(a)
of the Exchange Act against any of the Firms (or a similarly
situated U.S. registered broker-dealer), any U.S.-Affiliated
Foreign Dealer (or a similarly situated foreign broker-dealer)
if any of the U.S.-Affiliated Foreign Dealers (or a similarly
situated foreign broker-dealer) engages in the securities
activities described in your letter without registering as a
“broker” or “dealer” under Section 15 of the Exchange Act. n9

n9 Consultations with staff of the Department of the Treasury have
affirmed that this relief applies equally with respect to those
entities that are subject to 17 C.F.R. @ 401.9. See note 2 above.

This letter represents the views of the Division based on our
understanding of the proposed activities of the U.S.-Affiliated
Foreign Dealers as discussed in your letter. This staff position
concerns enforcement action only and does not represent a legal
conclusion regarding the applicability of the statutory or
regulatory provisions of the federal securities laws. Moreover,
this position is based solely on the representations that you have
made, and any different facts or conditions might require a
different response.

We are writing on behalf of our clients, listed in note 1 of this
letter, n1 to request your advice that the staff would not recommend
that the Securities and Exchange Commission (the “Commission”)
take any enforcement action against any of the Firms or any foreign
broker or dealer affiliated with any of the Firms (a “U.S.-Affiliated
Foreign Dealer”) in the event that a U.S.-Affiliated Foreign Dealer
engages in the securities activities described in Parts II.A
through II.C of this letter without registering as a “broker” or
“dealer” under Section 15 of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”).

In light of the growing internationalization of financial
markets, the Commission provided securities firms in the late
1980's with significant guidance -- first through a series of
no-action letters n2 and then through the adoption of Rule 15a-6 --
regarding the circumstances in which a foreign broker-dealer may
engage in securities activities with U.S. persons without having
to register under Section 15 of the Exchange Act. n3 In the years
since adoption of Rule 15a-6 the internationalization of the
securities markets has continued to accelerate. U.S. and foreign
securities firms increasingly compete directly with one another
to offer a comprehensive and cost-effective range of financial
products and related services to their customers. At the same
time, institutional investors have broadly come to consider it
essential to take a global approach in formulating their investment
strategy. In addition, the widespread availability of computer-
based and related communication technologies has led to greater
dissemination of securities-related information and trading activity
across borders, and has heightened the interrelationship between
U.S. and foreign markets.

n3 Comparable issues arise in connection with the registration
requirements for foreign government securities brokers or dealers
under the Government Securities Act of 1986, codified at Section
15C of the Exchange Act. In this regard, the Department of the
Treasury, pursuant to its authority under Section 15C(a)(5), has
adopted an exemptive rule that largely parallels Rule 15a-6. See
17 C.F.R. 401.9. Accordingly, pursuant to 17 C.F.R. 400.2(d)), the
Firms request that any no-action or interpretive relief granted by
the staff in response to this request with respect to the application
of Section 15(a) of the Exchange Act and Rule 15a-6 also apply
equally with respect to the entities that are subject to 17 C.F.R.
401.9.

Several aspects of the current U.S. regulatory regime unnecessarily
restrict and hamper the global competitiveness of U.S. broker-
dealers by severely limiting their ability to provide U.S. investors
with access to securities products and local market expertise
offered by foreign broker-dealers. In particular, Rule 15a-6 imposes
a number of restrictions on both (i) the categories of institutional
investors with which foreign broker-dealers may have contacts and
(ii) the specific regulatory and procedural functions that must
be performed by a U.S. broker-dealer intermediating transactions
between foreign broker-dealers and U.S. institutional investors.
These restrictions have, in light of experience with the Rule and
the evolution of the financial markets, proven unduly burdensome
in many respects -- frequently in circumstances where they do not
appear to achieve any clear offsetting regulatory benefits.

Accordingly, as a policy matter, the Firms strongly encourage the
Commission to evaluate broad reforms to the U.S. regulatory regime
that would enhance the competitiveness of U.S. securities firms and
eliminate practical barriers to participation by their foreign
affiliates in U.S. markets, while maintaining high standards of
investor protection and market integrity in the United States and
abroad. Moreover, a number of specific aspects of Rule 15a-6 pose
significant obstacles to the effective conduct of international
securities activities by U.S. broker-dealers and their foreign
affiliates. In the Firms' view, the elimination of these obstacles
requires especially prompt attention from the Commission that
should not wait for the adoption of needed broader reforms. The
Firms have therefore sought to identify, in Parts II.A through
II.C below, those areas in which prompt interpretive or no-action
relief from the staff would provide substantial benefits without
compromising investor protection.

Currently, the definitions of “major U.S. institutional
investor” and “U.S. institutional investor” set forth in
paragraphs (b)(4) and (b)(7) of Rule 15a-6, respectively, exclude
a number of important categories of large and experienced
institutional investors, thereby preventing foreign broker-
dealers from effecting transactions with such investors in
reliance on the exemption provided by paragraph (a)(3) of the
Rule. Because direct contacts by a foreign broker-dealer with
U.S. investors are permitted only if the investors meet these
definitional criteria, the limitations under the current rule on
eligible counterparties severely constrain the utility
of that exemption.

At present, even the largest U.S. business corporations and
partnerships do not qualify under the definitions of “U.S.
institutional investor” and “major U.S. institutional investor.”
These business enterprises have a strong interest in obtaining
direct access to foreign broker-dealers and form an important
component of the investor base for which U.S. broker-dealers
and their affiliates compete internationally. Moreover, these
investors have the financial wherewithal and experience necessary
to evaluate the potential rewards and risks of entering into
transactions involving foreign broker-dealers.

In addition, a number of the most important institutional
participants in the world financial markets are organized as
investment funds advised by investment managers exempt from
registration under the Investment Advisers Act of 1940 (the
“Investment Advisers Act”) (typically because of the small number
of clients that they advise). Because paragraph (b)(4) of Rule
15a-6 is never available for an unregistered adviser, the funds
and other clients advised by these managers currently cannot
qualify as “major U.S. institutional investors,” despite their
extensive experience in international markets and their substantial
assets.

Accordingly, the Firms request that the Commission provide no-action
relief that would expand the range of U.S. investors with which
U.S.-Affiliated Foreign Dealers may enter into securities
transactions in reliance on paragraph (a)(3) of Rule 15a-6.
Specifically, the Firms request that the staff grant no-action
relief that would permit, on the same basis as permitted for
transactions with “major U.S. institutional investors” under Rule
15a-6, a U.S.-Affiliated Foreign Dealer to enter into transactions
with any entity, including any investment adviser (whether or not
registered under the Investment Advisers Act), that owns or
controls (or, in the case of an investment adviser, has under
management) in excess of $ 100 million in aggregate financial
assets (i.e., cash, money-market instruments, securities of
unaffiliated issuers, futures, options on futures and other
derivative instruments). n4

n4 We understand that the asset test would be calculated on a
gross basis, without deduction for liabilities of the
institution, based on the balance sheet or comparable financial
statement of the institution prepared in the ordinary course of
its business. We also understand that the requested relief would
apply to transactions in U.S. and foreign securities.

The requested relief would substantially enhance the utility of
the paragraph (a)(3) exemption by extending its availability to
transactions with important additional categories of investors
whose experience and capabilities as to investment matters are
comparable to those of “major U.S. institutional investors” that
currently qualify under the Rule. In the Firms' view, no policy
objective appears to be served by continuing to exclude such
investors from the range of counterparties with which a
U.S.-Affiliated Foreign Dealer may engage in transactions under
the paragraph (a)(3) exemption, especially in light of the
participation of a U.S. broker-dealer intermediary and the other
protections afforded in transactions effected in reliance on that
exemption.

B. Direct Transfer of Funds and Securities Between U.S. Investors
and U.S.-Affiliated Foreign Dealers

Rule 15a-6(a)(3) explicitly requires that a U.S. registered
broker-dealer intermediating transactions between U.S. investors
and a foreign broker-dealer assume responsibility for certain
regulatory requirements.
Specifically, paragraph (a)(3)(iii)(A)(6) of Rule 15a-6 requires
that a U.S. broker-dealer intermediary be responsible for
“receiving, delivering, and safeguarding funds and securities in
connection with the transactions on behalf of the U.S. institutional
investor or the major U.S. institutional investor in compliance with
Rule 15c3-3” under the Exchange Act.

The application of paragraph (a)(3)(iii)(A)(6) is not entirely
clear in circumstances where a U.S. investor and a foreign broker-
dealer wish to settle a securities transaction intermediated by a
U.S. broker-dealer involving the direct transfer of funds and
securities. In particular, questions have arisen regarding whether,
under the Rule, the clearance and settlement of all such transfers
must be effected through the accounts of the U.S. broker-dealer
intermediating the transaction. In the Firms' view, a U.S. broker-
dealer should not be required to interpose itself in the mechanical
process of settling securities transactions effected pursuant to
paragraph (a)(3). Interposition of a U.S. broker-dealer in the
clearance and settlement process causes a significant duplication
of functions by the U.S. and foreign broker-dealer (e.g.,
maintaining duplicate custody arrangements and bank accounts,
and effecting duplicate transfers of funds and securities). This
duplication of functions not only is inefficient from a cost
perspective, but also increases the risk of operational errors and
settlement failure (since twice the number of bookkeeping entries
and transfers must occur). Moreover, entities qualifying as “U.S.
institutional investors” and “major U.S. institutional investors”
frequently elect (and may, in some cases, be required by law) to
engage foreign custodians directly to hold, receive and deliver
their foreign securities and local currency (including in
circumstances where a foreign jurisdiction prohibits U.S. broker-
dealers from holding securities or currency for customers). In
this context, the current rule appears to provide little benefit
to U.S. institutional investors and imposes a significant barrier
to efficient settlement of international transactions.

Thus, the Firms request that the staff provide guidance confirming
that, in transactions involving foreign securities n5 or U.S.
Government securities intermediated by a U.S. broker-dealer under
Rule 15a-6, clearance and settlement may occur through the direct
transfer of funds and securities between the U.S. investor and the
foreign broker-dealer in situations where the foreign broker-dealer
is not acting as custodian of the funds or securities of the U.S.
investor. n6 This guidance would confirm that for such transactions
in such situations the U.S. investor or its custodian could transfer
funds or such securities directly to the foreign broker-dealer
or its agent and the foreign broker-dealer or its agent could
transfer any funds or such securities directly to the U.S. investor
or its custodian. We understand that this guidance would be
applicable only in circumstances where (i) the foreign broker-dealer
agrees to make available to the intermediating U.S. broker-dealer
clearance and settlement information relating to such transfers
and (ii) the foreign broker-dealer is not in default on any material
financial market transactions.

n5 For purposes of this request, we use the term “foreign
securities” as defined in our previous correspondence relating to
Rule 15a-6. See Cleary, Gottlieb, Steen & Hamilton (November 22,
1995, revised January 30, 1996).

n6 In general, the difficulties described above relate primarily
to transactions in foreign securities and U.S. Government
securities and thus the Firms do not, at present, request that
the staff address the issues that would be posed more generally by
transactions involving U.S. securities, although it may be
appropriate to do so in the context of anticipated rulemaking in
this area.

This interpretive relief would enhance the ability of U.S.
investors to enter into securities transactions with foreign
broker-dealers without detracting significantly from the
Commission's investor protection mandate under the Exchange Act.
Although certain mechanical aspects of clearing and settling
transactions would not be performed by the U.S. broker-dealer
intermediary, U.S. investors would continue to benefit from the
other protections provided by Rule 15a-6. In particular, the
U.S. broker-dealer would fulfill all of the other enumerated
duties under paragraph (a)(3)(iii)(A), including effecting the
transactions, issuing required confirmations and maintaining
required books and records relating to the transactions. n7

n7 The inability of a foreign broker-dealer to receive and
safeguard securities for customers in transactions effected under
Rule 15a-6 presents a hindrance to the effective provision of
cross-border securities services to U.S. investors. The laws of
several foreign jurisdictions effectively prohibit a U.S. broker-
dealer from clearing and settling transactions for its customers
in those jurisdictions. In light of the obstacles that local
legal, tax and similar restrictions may pose to the ability of
a U.S. broker-dealer to provide safekeeping services to U.S.
customers investing in a foreign country, we understand that the
Commission staff has been and would continue to be willing to
provide individual firms with prompt assistance addressing these
concerns on a case-by-case basis through the no-action process.
See Morgan Stanley India Securities Pvt. Ld.
(December 20, 1996).

The requested relief would apply solely to the operational issue
of the transfer of funds and securities between a foreign
broker-dealer and a U.S. institutional investor or a major U.S.
institutional investor (including an entity qualifying pursuant
to the relief requested in Part II.A of this letter) in the context
of clearance and settlement of transactions in foreign securities
or U.S. Government securities between that foreign broker-dealer
and that U.S. investor where the foreign broker-dealer is not
acting as custodian for the U.S. investor.
We understand that the granting of such relief should not be
construed to suggest that the staff has made any implicit or
explicit determination regarding the permissibility of any
particular transaction or custodial arrangement related to such
a transfer. In other words, the foreign broker-dealer would continue
to be required to ensure that each such transaction and any custodial
arrangement qualifies in all other respects for exemption under the
Rule, even though the direct transfer of funds and securities
would be permitted to occur as described above.

Paragraph (a)(3) of Rule 15a-6 requires that an associated person
of a U.S. broker-dealer intermediary participate in certain
communications between foreign associated persons of a foreign
broker-dealer and U.S. investors. Specifically, paragraph (a)(3)
(iii)(B) requires that an associated person of the U.S. broker-
dealer intermediary participate in any oral communications between
foreign associated persons and U.S. institutional investors that
are not “major U.S. institutional investors,” and paragraph (a)(3)
(ii)(A)(1) requires participation by an associated person of the
U.S. broker-dealer intermediary in connection with visits in the
United States by a foreign associated person with both U.S.
institutional investors and major U.S. institutional investors.

1. Chaperoning Requirements

The “chaperoning” requirements prescribed by paragraph (a)(3) of
Rule 15a-6 have proven awkward to implement in practice,
particularly in the context of Asian markets separated from the
United States by a large number of time zones. Moreover,
“chaperoning” provides only slight policy benefits given the
experience and capabilities of the U.S. institutional investors
eligible to enter into transactions under paragraph (a)(3) and
the other investor protections provided under that exemption,
including in particular the requirement that any foreign associated
person not be subject to a “statutory disqualification” as defined
in Section 3(a)(39) of the Exchange Act. In addition, the apparent
absence of significant abuses in the context of major U.S.
institutional investors (for whom “chaperoning” of oral
communications generally is not required) since the adoption of
Rule 15a-6 further confirms the appropriateness
of limiting the scope of the chaperoning requirement for all U.S.
institutional investors eligible to have direct contacts with
foreign broker-dealers under the Rule.

Accordingly, the Firms request that the staff grant no-action
relief that would permit foreign associated persons of a U.S.-
Affiliated Foreign Dealer, without the participation of an
associated person of an affiliated Firm, n8 to (i) engage in oral
communications from outside the United States with U.S.
institutional investors where such communications take place
outside of the trading hours of the New York Stock Exchange
(i.e., at present, 9:30 a.m. to 4:00 p.m. New York Time), so long
as the foreign associated persons do not accept orders to effect
transactions other than those involving foreign securities (as
defined in note 5 above) and, (ii) have in-person contacts during
visits to the United States with major U.S. institutional investors
(including those investors with which a U.S.-Affiliated Foreign
Dealer would be able to enter into transactions pursuant to the
relief requested in Part II.A of this letter), so long as the
number of days on which such in-person contacts occur does not
exceed 30 per year and the foreign associated persons engaged in
such in-person contacts do not accept orders while in the United
States to effect securities transactions. n9

n8 We understand that foreign associated persons of the U.S.-
Affiliated Foreign Dealers would continue to be able to have
“unchaperoned” contacts with U.S. persons at any time if they
are “two-hatted” (i.e., also qualified as registered
representatives acting on behalf of and under the supervision of
an affiliated Firm under U.S. self-regulatory
organization guidelines).

n9 In addition to the specific relief relating to “chaperoned”
contacts described above, the Firms request clarification from
the staff that the limitations set forth in paragraph (a)(2)(ii)
of Rule 15a-6 would not prohibit a foreign broker-dealer from
initiating follow-up contacts with major U.S. institutional
investors (including those entities qualifying pursuant to the
relief requested in Part II.A of this letter) to which it has
furnished research reports, if such follow-up contacts occur in
the context of a relationship between a foreign broker-dealer
and a U.S. intermediary broker-dealer under the Rule.

2. Electronic Quotation Systems

In the adopting release for Rule 15a-6, n10 the Commission
directed a number of comments to the application of the broker-
dealer registration requirement to foreign broker-dealers whose
quotations are distributed to investors through electronic
systems. Specifically, the Adopting Release sets forth the
interpretive position that Rule 15a-6 “generally would permit
the U.S. distribution of foreign broker-dealers' quotations
by third party systems … that distributed these quotations
primarily in foreign countries,” but indicated that this position
would be available “only to third-party systems that did not
allow securities transactions to be executed between the foreign
broker-dealer and persons in the U.S. through the systems.” n11
In the Firms' view, because third-party quotation services have
become increasingly global in scope since the time of the
adoption of Rule 15a-6, this distinction between systems that
distribute quotations primarily in the U.S. and systems that
distribute quotations “primarily in foreign countries” can no
longer, in practice, serve as a useful dividing line for
achieving the Commission's regulatory objectives.

n11 The Commission stated, however, that foreign broker-dealers
whose quotes were distributed through such systems would not be
allowed to initiate contacts with U.S. persons “beyond those
exempted under [Rule 15a-6], without registration or further
exemptive rulemaking.” Adopting Release,
54 Fed. Reg. at 30,018.

With respect to proprietary quotation systems, the Adopting
Release noted that “direct dissemination of a foreign market
maker's quotations to U.S. investors, such as through a private
quote system controlled by a foreign broker-dealer” would not be
appropriate because the dissemination of such quotations would
constitute a direct inducement to trade with that foreign
broker-dealer. n12 There is no express indication, however,
that the Commission's position in the Adopting Release is intended
to preclude a foreign broker-dealer from directly “inducing” U.S.
investors to trade with the foreign broker-dealer via a quotation
system where the U.S. investor subscribes to the quotation system
through a U.S. broker-dealer, the U.S. broker-dealer has continuing
access to the quotation system, and the foreign broker-dealer's
other contacts with U.S. investors are permissible
under Rule 15a-6.

n12 Adopting Release, 54 Fed. Reg. at 30,019.

Where a U.S. institutional investor effects transactions through
a U.S. broker-dealer intermediary, no customer protection or other
policy objective would seem to be served by denying the
institutional investor direct electronic access to the quotations
of a foreign broker-dealer -- especially since Rule 15a-6 currently
provides clear authority for the quotations to be conveyed
orally (if inconveniently) through a registered representative
associated with the U.S. broker-dealer. In the Firms' view, the
availability of improved technologies for providing investors
with quotations should not be restricted merely because it is
impossible to “chaperone” a data transmission.

Accordingly, the Firms request the staff's advice clarifying
that, in light of this technological evolution, the interpretive
portions of the Adopting Release requiring operation of quotation
systems by third parties that primarily distribute quotations
in foreign countries no longer apply. n13 In this connection,
the Firms specifically request confirmation by the
staff that providing U.S. investors with access to
proprietary and third-party screen-based quotation systems that
supply quotations, prices and other trade-reporting information
input directly by foreign broker-dealers will not constitute an
impermissible “contact” with a foreign broker-dealer, so long as
any transactions between the U.S. investor and the foreign broker-
dealer are intermediated in accordance with the requirements of
Rule 15a-6. n14 In addition, we understand that the staff would
be willing to provide individual firms with prompt additional
guidance regarding the execution of such intermediated
transactions through an automated trading system operated
by the registered U.S. broker-dealer intermediary.

n13 In addition to providing the specific clarification requested
herein with regard to screen-based information systems, the
Firms additionally encourage the Commission to continue its more
general evaluation of issues under the Exchange Act and other
federal securities laws relating to the impact of emerging
technologies on the U.S. regulatory regime, including issues
relating to electronic trading systems.

n14 We recognize in this connection, however, that a foreign
broker-dealer that directs quotations to U.S. investors through
a proprietary system (as distinct from a third-party system)
would be viewed as having “solicited” any resulting transactions
(and thus could not rely on the exemption in paragraph (a)(1) of
Rule 15a-6), although it would continue to be allowed
to effect transactions in reliance on other available
provisions of the Rule.

III. Conclusion

Based on the foregoing, we request your advice that the staff
would not recommend that the Commission take any enforcement
action against any of the Firms or any U.S.-Affiliated Foreign
Dealer in the event that a U.S.-Affiliated Foreign Dealer engages
in the securities activities described in Parts II.A through II.C
above without registering as a “broker” or “dealer” under Section
15 of the Exchange Act.

We would appreciate consideration of these matters as promptly as
practicable. If for any reason the staff is not disposed to grant
the requested no-action relief, we would also appreciate an
opportunity to discuss the situation with the staff prior to the
issuance of any formal letters. Questions regarding this no-action
request should be directed to the undersigned (at 202-728-2758).